JPMorgan Income ETF JPIE

JPMorgan Income’s compelling strategy, veteran portfolio managers, and abundant global fixed-income resources merit an upgrade in its Morningstar Analyst Rating to Silver for the open-end fund's cheapest share class and exchange-traded version and Bronze and Neutral, respectively, for its pricier share classes.

Although the strategy’s ETF launched only in late 2021, Andrew Norelli has capably led this team-managed strategy since its mid-2014 inception. Comanagers Drew Headley and Thomas Hauser partner with him and focus on securitized credit and high yield, respectively. The managers work alongside a small army of sector specialists, researchers, and portfolio managers within J.P. Morgan's global fixed income franchise to evaluate risk/reward trade-offs across a broad investment toolbox. Each comanager brings their respective expertise but work closely to understand relative value opportunities across all markets.

This strategy's objective is straightforward, but its investment mandate is wide and complex. The comanagers aim to generate consistent income with broad diversification in a risk-aware construct. This requires a detailed understanding of multiple asset classes and cross correlations between them. The team limits non-investment-grade debt exposure to 65% and also has a 10% ceiling on non-U.S.-dollar-denominated bonds, but otherwise freely rotates across sectors, geographic regions, and the yield curve–with a wide duration band of 10 years or less.

High-yield corporates (29% as of September 2022) and securitized bonds (65%) make up the backbone of this fund and the team complements these with smaller stakes in emerging-markets debt and investment-grade credit. By building diversified exposures across these yield-heavy sectors, the comanagers aim to keep volatility (standard deviation) over a market cycle between 4% and 6%, which is roughly in line with the strategy's typical peer.

Since July 2014 (Norelli’s first full month on the job), the R6 shares' 2.9% annualized return through November 2022 soundly outpaced its distinct multisector bond Morningstar Category median peer's 2.0% result. On a risk-adjusted basis, the strategy's Sharpe ratio (a measure of return relative to volatility) stood out by beating more than 80% of rivals. And while this is a benchmark-agnostic fund, it topped the Bloomberg U.S. Universal Index by 180 basis points over the same period. Yet, investors should note that this strategy's elastic positioning has led to varied outcomes over credit and interest-rate selloffs, contributing at times to heightened volatility.

The managers benefit from the advantages of J.P. Morgan's size and expertise across its vast global fixed-income network to execute this collaborative approach, earning a Process rating upgrade to Above Average from Average.

This strategy is tailor-made to draw on the firm's small army of global macroeconomic and sector specialists. They help the team here synthesize various inputs to create a diversified best-ideas’ portfolio. It doesn't follow a benchmark, but like other J.P. Morgan strategies, this one relies on various top-down and bottom-up calls to achieve diversification within higher-income areas, such as high-yield corporate bonds and securitized debt.

J.P. Morgan's quarterly macroeconomic outlook guides broad portfolio positioning, but it's the constant feedback loop between the team and sector specialists, research analysts, and traders that inform most investment decisions. Lead manager Andrew Norelli brings his multisector view of the bond market, while comanagers Drew Headley and Tom Hauser offer their expertise in securitized credit and high-yield corporates, respectively. A focus on overall risk and relative valuations drives portfolio construction with the aim of keeping volatility within a 4% to 6% standard deviation range. The strategy's investment parameters are broad, with a duration band of less than 10 years (typically between two and six years), a maximum of 65% in below-investment-grade debt, and a 10% maximum in non-U.S.-dollar-denominated securities.

High-yield corporates and securitized credit make up the foundation of this portfolio, but the asset mix has evolved over time. This dynamic mandate uses its wide discretion over duration and sector allocations to align the portfolio with its best income ideas driven by relative value.

Securitized bonds make up nearly 65% of assets (as of September 2022), comprising agency mortgage-backed securities (11%), nonagency MBS (10%), commercial MBS (26%), and asset-backed securities (18%). The team favors these sectors given their better relative value and convexity profiles over investment-grade corporates. The recent increase in CMBS to 26% from 16% in early 2020 reflects their view of their recovery from the coronavirus lockdown and relative value in commercial real estate. High yield has constituted between 22% and 40% of assets since inception and held a 29% stake as of September 2022. Coming into the 2020's pandemic-driven drawdown, the team lightened up on high-yield credit risk to 22% at year-end 2019, about 10 percentage points lower than nine months prior. A smattering of emerging-markets bonds and investment-grade corporates round out the allocation.

Interest-rate bets largely through U.S. Treasuries futures don't typically drive performance here but are used instead to manage overall risk. In anticipation of the negative economic impact of the Russia-Ukraine war, the comanagers increased duration to 3.8 years in September 2022 from 1.9 years at the end of 2021.

The trio of fixed-income veterans who lead this strategy complement each other's respective areas of expertise and draw on J.P. Morgan's vast global fixed-income resources to earn a People rating upgrade to Above Average from Average. Andrew Norelli is the architect and main draw here, having managed the strategy since its 2014 inception; he brings over 20 years of macroeconomic and multisector bond expertise. Comanagers Drew Headley and Tom Hauser joined the roster in 2017 and 2020, respectively. Headley, with over 28 years of industry experience, heads the securitized strategies at the firm and manages the securitized sleeve of the portfolio, while Hauser is a high-yield specialist with nearly 30 years under his belt and manages the non-investment-grade corporate sleeve for the fund.

The comanagers' respective specialties complement each other and the strategy's flexible mandate and emphases, but they don't make decisions in a vacuum. To truly understand their relative value mindset, this collaborative approach requires each manager to be well-versed in other areas and to leverage the firm’s supporting resources. Kay Herr, a 20-year research pro, leads the global credit research team, which includes 21 investment-grade, 21 high-yield, and nine structured credit analysts.

The comanagers make decisions as a team and if they each don't agree on a particular trade, it does not make the cut. While each manager offers their input, Norelli's broader market expertise and since-inception tenure introduces moderate key-manager risk.

Norelli and Headley each invest more than $1 million in the strategy and Hauser at least $100,000.

A well-resourced, thoughtful, and disciplined steward of client assets, JPMorgan Asset Management maintains an Above Average Parent rating.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various global cohorts and diverse asset classes, the firm has more tightly integrated its capabilities in recent years, notably through the development of proprietary analytical and risk systems. Investment teams are robustly staffed and helmed by seasoned contributors. The firm’s strategies tend to produce reliable portfolios, and several flagship offerings are Morningstar Medalists. Manager incentives align with fundholders'; compensation reflects longer-term performance factors, and portfolio managers invest in the firm’s strategies as part of their compensation plans.

The firm’s funds tend to be well-priced, but they aren’t as competitive as many highly regarded peers of similar scale. Recent product launches include thematic and single-country strategies, both of which carry the potential for volatile performance and flows, along with misuse by investors. The firm remains intrepid when it comes to developing an environmental, social, and governance-focused framework and continues to move into other areas such as direct indexing through its 55iP acquisition and China through its joint venture, but these complicated initiatives take time to assess any real and lasting effect.

Strategy results since July 2014, lead manager Andrew Norelli’s first full month on the job, reflect solid absolute and risk-adjusted performance. The R6 shares' 2.9% annualized return through November 2022 beat the distinct multisector bond category peer median by about 90 basis points. Investors were amply rewarded for the level of risk over this period with a Sharpe ratio (a measure of return relative to standard deviation) that in the peer group’s top quintile. Income generated from high yield and securitized credit were the largest contributors. And while this is a benchmark-agnostic strategy, the fund beat the Bloomberg U.S. Universal Index by 180 basis points over the same period.

Yet, investors should note that this strategy's elastic positioning has led to varied outcomes over the period’s credit and interest-rate selloffs, contributing to its above-average volatility. Most notably, the fund's 16% CMBS stake coming into 2020 contributed to its 12.6% drop that year, 3.2 percentage points more severe than its typical peer and worse than 80% of rivals. However, the strategy’s increased duration and general derisking, including small shorts to Russia, helped it soften the drawdown in 2022’s first quarter with a 2.6% loss, less severe than the 4.3% drop of its typical rival.

Amid heightened volatility over the year to date through November 2022, the strategy's 8.0% loss ranked near the multisector category's top quartile, 2.2 percentage points better than its median peer.

It’s critical to evaluate expenses, as they come directly out of returns. Based on our assessment of the fund’s People, Process, and Parent pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.